Relief Rally?
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions nor be construed as a recommendation or advice to engage in investment transactions.)
Summary
Technical: BTC is hugging the $30,000 support and not letting go. A break out of this tight range should bring momentum to either side. Over $31,000, we could see a relief rally to $34,000. Under $28,500 and we can see a revisit of $25,000 support
Markets: Crypto markets had a tranquil week after the previous bloodbath. This week the S&P 500 saw its worst day since 2022 falling 4% in one day, led by weak earnings results from major retailers
Important News
- May 17: Walmart and Target reported bad earnings and decreased profitability due to an increase in operating costs
- May 18: U.K. inflation soared to 9%, the highest print since records began in their current form in 1989
- May 18: Goldman Sachs, JPMorgan, and S&P Global all cut U.S. GDP forecasts in 2022 and 2023
- May 19: US initial jobless claim 218k vs 200k forecast
Not much has changed in the crypto market this past week. We saw extreme volatility fade in confluence with the tight $2,000 range we experienced. While quiet in the crypto space, we saw the action transfer over to equities. Walmart and Target released earnings showing a rapid decrease in profit margins due to increased costs and lessening consumer demand for discretionary products. This confirmed that inflation is not over and probably won’t be within this year. Walmart and Target both lowered their YOY guidance, bringing fear into the markets as everyone assumed big-box retailers like them would perform the best in times of high inflation.
Technical Analysis
Bitcoin traded sideways in a super tight range. It seems like Bitcoin is compressing and storing up energy to support a move out of this trading range. We have a slight bias that it will be to the upside, but as said before, the market does not care about our biases. During this week, we have seen increased volume bars on the down days showing significant selling. However, prices have held up very well, which leads us to believe that buyers are accumulating here. Every time we moved up to the top of the range, sellers stepped in and took us lower. The bears and bulls are fighting hard, and when we break out, it will be a good trading opportunity.
If we break to the upside, one level to watch for is the monthly VWAP price shown in the red dotted line on the chart below. VWAP stands for volume-weighted average price, which is used to indicate the average price the asset transacted at during a specific period. In the past couple of months, we have been consistently rejected at the VWAP, and if we are to reclaim it, we could easily make a move to $34,000 before facing any further resistance.
We said last week that Bitcoin has to move lower before finding an ultimate bottom. We are leaning towards a relief rally before continuing down in the short term. We updated the metrics from last week, but not much has changed. We still see a value zone and high demand in the $18,000 – $23,000 range.
Source2 Glassnode
Source2 Glassnode
Recommendation
Swing Trading (Manual) | hands-on approach
There are currently two options.
- Wait until prices break over $31,000 to enter long and put stops near $30,000. If prices fall back into the lower half of the trading range, it will invalidate this trade. First resistance is $31,800 then $34,000
- Wait until prices break under $28,500 to enter short and put stops around $29,500. Target is $25,000 no real support in between
The trade outlined is an example of a trade with great risk to reward. If placing a trade like this, you are essentially risking $1,000 to make $3,000, translating into a 3:1 risk-reward ratio. The risk here is that there might be fake moves on either side. So make sure that prices are breaking out with large volume and if it seems that we are reverting inside the trading range too quickly, then get out of the position.
Hodler (Moon Bot) | 1 – 3 year time frame
Same recommendation as last week. Those in it for the long run can open up moon bots with 10% – 20% of your capital. This way, if Bitcoin drops further, you can create another bot with your free capital, thus bringing down your average cost.
Risk-averse (Grid Bot) | 1 – 12 month
Same recommendation as last week, given that the market has not moved. With the people who have a shorter time frame in mind, I would recommend opening up a grid trading bot with a small portion of your capital (10%) if Bitcoin moves lower to the realized price of $24,000. I would use a lower bound of ~$20,000 and an upper bound of ~$37,000, with 30 – 40 grids. This way, you can maximize these volatile moves while reducing transaction fees. If prices move lower to $24,000, you could open another gridbot with a slightly bigger percentage of your portfolio, 10% – 20%.
Bitcoin’s daily volatility in the past 30 days is 4.21%, down 5% from last week. Its approximate average daily range going back 60 days is $2,051.
Our View
The impact of high inflation on US consumption has finally emerged. US retailers have always been on the front line of the storm to battle rising inflation, especially for rising fuel, freight costs, and labor expenses. Investors are worried that this situation will not end soon for department stores after consecutive days that sent giants like Walmart and Target to their worst down days since 1987. If overall consumer spending weakens, things will look uglier, and the US economy will move closer to a recession.
However, this time we want to be the contrarian. Despite the ongoing selloffs across the street, we see signs of a potential bottom:
- S&P touched its bear market threshold on May 21st and immediately began to rebound
- The 10-year U.S. Treasury yield hit a low of around 2.77%
- The US dollar index (DXY) quickly retreated after hitting 105 on May 12th
For now, it appears that two of the three markets mentioned above (fixed income and FX) are reversing after touching their key levels. Furthermore, if the U.S. stock market bottoms out, we can conclude that a turning point for major assets has arrived.
Source: CME Fed Watchtool
Essentially, the most dangerous time is possibly behind us, and the market’s expectation for the Fed’s tightening cycle is lowering:
- Above data from the CME Fed Watch tool shows the current rate hike cycle is expected to peak around 3.1% (the figure was approximately 3.5% at the beginning of this month)
- Reduced expectations for a 50bps rate hike in September (meaning there are only two 50bps hikes left showing above, i.e. June and July)
- Odds on a 75bps rate hike disappeared
To sum up, the worst time may be behind us, and it may be a period full of economic data turning points in the next 2-3 months. We are especially looking forward to a possible slowdown in inflation data. As a result, major markets will react ahead of these important data releases, and it’s probably a good time to build a position.
Fundamental Analysis
Source2 Glassnode
Bitcoin shows a pretty resilient picture compared with other crypto assets. After last week’s sell-off with vast amounts of BTC transferred to exchanges, we see selling pressure calm down this week. On-chain data from Glassnode shows that the Bitcoin exchange balance has remained relatively stable since May 16th.
Source2 Glassnode
Furthermore, in terms of stablecoin balance, we didn’t see signs of outflow for USDT, and it has been holding steady following the epic surge on May 14th. This partly proves our view last week that if we continue to see a combination of further stablecoin inflows and a marginal decline in Bitcoin balance, there could be a brighter outlook for Bitcoin and other cryptocurrencies in the coming sessions.
On top of that, recent data indicates Bitcoin monthly implied volatility (IV) has been down a lot from last week’s high of around 110, showing an 85~90 range bounce scenario. Low volatility is necessary for a potential healthy bottom at current prices. Like when a ship encounters a storm, its priority is to slow down and stabilize the body rather than keep humming at full speed while rocking wildly.
Source2 Glassnode
The Dormancy value measures the age of the coins moving calculated through the amount and how long the coin has been dormant. High value implies coins that previously had not moved for a long time are on the move, and low value implies the opposite. Entity-Adjusted Dormancy Flow is a variation of Dormancy that uses the ratio between market capitalization and Dormancy value. This modified indicator can be used mainly to predict market bottoms. It is also used to determine long-term trends (bullish/bearish). Data shows market bottoms are associated with prints below 250,000 (red circles).
This week we also saw a slight decrease in high yield corporate bonds. As we talked about last week, this has often been a leading indicator of Bitcoin moves. Our findings from fundamental and market sentiment perspectives show that a potential bottom is starting to form.
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